Is Vonage Holdings Corp. (VG) Still Undervalued?

The company’s most massive expense, beyond direct costs, is its marketing. If you have your TV on for more than three minutes, you’ve likely seen a Vonage ad. While some investors and analysts have complained about this major expense, it has paid off lately. If you remove the marketing spend from the income statement, the company is making a bundle of cash at a very low ratio. Not to suggest that the company will discontinue its massive ad spending, but even a slight reduction going forward would boost profits substantially.

I find Vonage to be slightly undervalued given its growth prospects. Management believes its new initiatives can contribute $100 million in annual revenue by 2014. That would potentially push Vonage’s annual take over $1 billion while its current market cap is just $560.95 million.

Vonage is in prime position to offer the new equivalent of calling cards to lower-income customers in developing areas all over the world while attracting other, more affluent customers via its new mobile offerings and international calling packages. Management has been extremely effective in creating a leaner, more cash-generating business and I believe they will continue to do so going forward. As always, invest only in that which you are knowledgeable and comfortable.

The article Is Vonage Still Undervalued? originally appeared on Fool.com and is written by Michael B. Lewis.

Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.